I know that Portfolio Managers do not always clearly explain the fees and charges payable by the client. SEBI has stepped in regarding clauses relating to fees and charges in the portfolio manager-client agreement.
The SEBI order is very lucid and comes with simple illustrations. But it’s sad that they have to regulate such basic stuff like being transparent on the fee that they charge.
Some excerpts:
The portfolio manager shall charge performance based fee only on increase in portfolio value in excess of the previously achieved high water mark.
Illustration: Consider that frequency of charging of performance fees is annual.
A client’s initial contribution is Rs.10,00,000, which then rises to Rs.12,00,000 in its first year; a performance fee/ profit sharing would be payable on the Rs.2,00,000 return. In the next year the portfolio value drops to Rs.11,00,000 hence no performance fee would be payable. If in the third year the Portfolio rises to Rs.13,00,000, a performance fee/profit sharing would be payable only on the Rs1,00,000 profit which is portfolio value in excess of the previously achieved high water mark of Rs.12,00,000, rather than on the full return during that year from Rs.11,00,000 to Rs.13,00,000.
Another lucid illustration of the fees and the returns are as under:
The assumptions for the illustration are as follows:
a. Size of sample portfolio: Rs. 10 lacs over
b. Period: 1 year
c. Hurdle Rate: 10% of amount invested
d. Brokerage/ DP charges/ transaction charges: Weighted Average of such charges (as a percentage of assets under management) levied in the past year/ in case of new portfolio managers indicative charges as a percentage of assets under management (e.g. 2%)
e. Upfront fee (e.g. 2%)
f. Management fee (e.g. 2%)
g. Performance fee (e.g. 20% of profits over hurdle rate)
h. The frequency of calculating all fees is annual.
The example cites a case when the portfolio has increased by 20%. The return for the client after accounting for the fees works out to 11.72%
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Still too step and costly.
i like to add tha the minimum period for charging performance fee is quarterly as per the order. is it correct?
Off the topic comment,
Some time back you had initiated action to create a group [financial literate sort of], which will negotiate will financial service provider for better rate/charges …
didnt see any update on it [neither i received an email though i registered] any comment here/offline?
Abhishek,
We need a bigger group and we could not devote time to get more members. This was due to our other engagements.
I will go full time into building the group in November’ 2010.
Thanks for taking time to write.
Ranjan,
How can we know about the charges that are being deducted presently from any Fund towards the portfolio manager so as to decide on the investment?
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Yeah, the charges seems high, but apart from these there have been other issues with Portfolio Managers… here is one account of an experience http://shabbir.in/sharekhan-pms-review/
BTW I came after a long time at your blog